Ethereum Explained for Beginners

written by David AmoyalPublish date: 01/06/2018(Last updated: August 02, 2018 06:53 AM)

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Ethereum is a decentralized, open software, blockchain platform which runs on smart contracts that allow decentralized appplications (dapps) to run on it.

The Ethereum platform is responsible for hundreds of ERC-20 token-based ICOs. Ethereum functions on a PoW protocol, but will soon be functioning as a PoS protocol.

Ethereum’s main functionality serves to provide a platform for an entire ecosystem of decentralized applications.

Ethereum borrows several elements from Bitcoin’s blockchain design and protocol. However, it also has several different elements to support the development of applications that allow for several different tweaks.

Ethereum Smart Contract

a smart contract is essentially just a string of computer code that automatically executes when specific predetermined conditions are met.

There is no central authority that has to hit “approve” or “disapprove”. Smart contracts are automatic and self-operated.

As you can imagine, this makes anything from payment and work agreements to essentially futures contracts much more fair, objective, transparent and efficient. An integral part to how Ethereum works is smart contracts.

The Ethereum network is essentially based on “smart contracts”, or essentially strings of code that is based on digital triggers that can be implemented to execute certain tasks.

These smart contracts are automated and allow for multiple parties to work together efficiently.

A smart contract, for example, could be something like “Pay Jimmy 100 Ether when/if he is able to submit a 1,000 word article about ‘The Benefits of Living in San Francisco for Young Professionals’ by January 25th, 2018.”

How Smart Contracts Work?

Here’s an example of a simple smart contract.

Jenny wants to make a bet with Benjamin that the price of a single Bitcoin will be above or at $200,000 by end of day December 31st, 2018.

Jenny bets Benjamin 1000 Ether that that above condition will be met.

The smart contract would reflect that if a single Bitcoin is above or at $200,000 by end of day December 31st, 2018, Jenny will receive 1000 Ether. If not, Benjamin will receive 1000 Ether.

Both parties place 1000 ETH into an escrow tied to a smart contract, and the winner would receive the full 2000 ETH once the data feed is queried on end of day December 31st, 201

By using a smart contract, Jenny and Benjamin don’t need to place any trust in any other party other than the programmed smart contract.

While this is only a very simple example, smart contracts are capable of high levels of complexity that can do extraordinary things.

Decentralized Autonomous Organization

These smart contracts can essentially create a DAO, or a Decentralized Autonomous Organization. These DAOs are fully autonomous and decentralized (as per their name) without a central leader. They are run by code that is a bunch of smart contracts on the Ethereum blockchain put together.

These contracts can replace the need for any control or human beings. Ownership of the DAO is distributed among everyone who purchases tokens. These tokens give people voting rights or whatever else happens to be specified in the specific DAO’s programming.

ERC-20 Tokens

ERC20 tokens are the token standard for smart contracts. They come with a common list of rules that a new Ethereum-based token has to implement. This is what allows developers to program new tokens that function within the Ethereum ecosystem. ERC20 tokens are very popular with ICOs.

To get a more in-depth understanding of how Ethereum works, check out the Ethereum whitepaper. You can also mine Ethereum using the appropriate hardware. You can also join a mining pool such as Ether Mining Pool.

ֿEthereum Advantages

As the second largest market cap coin, Ethereum has attracted a ton of attention from investors and speculators.

These are a few points you should keep in mind if you are considering investing in Ethereum.

Ethereum plays a significant role in powering the community of decentralized apps. There are few tokens out there (if any) that are as interconnected as Ethereum

Ethereum has a strong, vocal community of founders and supporters. While Ethereum is decentralized, it has many important figures that are committed to its success.

Ethereum processes more daily transactions than all other cryptocurrencies combined. With such a high level of responsibility, it doesn’t seem like Ethereum could go anywhere but continue to be an extremely active platform. You can see the amount of transactions processed here.

Notable Issues:

There is no cap to the amount of Ethereum that will be issued. This is an inherent threat to Ethereum’s price, as the greater the Ethereum supply is, the lower the price would be as well.

Ethereum faces several scalability constraints. The sheer amount of apps on the Ethereum platform is not without its drawbacks. With so much action going on, Ethereum faces several bottlenecks such as extensive backlogs of transactions that need to be verified that could pop up in high activity times.

How to Buy Ethereum?

Ethereum is a cryptocurrency that is fairly easy to buy because it’s offered essentially everywhere.

Here are a few steps to get you started:

Set up a wallet. Wallets can be downloaded online at websites like MyEtherwallet. Most exchanges such as Coinbase (one of the most popular) also come with a wallet native to the platform.

Back up your keys. Similar to Bitcoin, an individual’s Ethereum balance is kept using two keys: a public key (which is a lot like a bank account number) and a private key (which is like a PIN number and looks like 3a1076bf45ab87712ad64ccb3b10217737f7faacbf2872e88fdd9a537d8fe266). The private key unlocks your wallet and make Bitcoin transactions, and you should never give your private key to anyone. The public key, on the other hand, is where others can send you Ether that will go into your wallet.

Choose an exchange platform. There are a handful of different exchange platforms that serve the purpose of allowing users to buy and sell various cryptocurrencies.

Make a purchase: The work required for making a purchase usually varies on the platform of choice, with some platforms being much easier to understand than others.

Popular Ethereum Exchanges

You can purchase Ethereum from a wide variety of Ethereum exchanges. Each exchange varies in complexity, fees, and sometimes even prices. The most popular exchanges include GDAX (Coinbase), Bitfinex, Bithumb, Poloniex, Bittrex, Binance, and Kraken. You can also buy Ethereum on EtherDelta.

When purchasing Ethereum, be mindful of the currency pairings. Some exchanges such as Coinbase and GDAX allow you to purchase Ethereum directly with US dollars, whereas others will require you to trade with a different cryptocurrency such as Bitcoin.

We’ll highlight a few of the top exchanges.

Coinbase

Coinbase serves as a great jumping point to purchase Ethereum for beginners.

Launched in 2012 as a spin off from the GDAX platform, Coinbase was made to make buying and selling Bitcoin much easier. As time progressed, Coinbase added Ethereum to its exchanges. Coinbase charges fees that range from 1.49% to 3.99% based on your payment method of choice. It is one of the few platforms that allows for a fiat to Ethereum transaction. Using Coinbase comes with its distinct advantages:

You’re able to see the guaranteed price and fees when you order.

Simple purchasing interface.

You can lock in prices faster on Coinbase than other exchanges.

You can use your bank, or credit and debit cards to make a purchase.

Your guaranteed price and fees are clearly stated at the time of your order. This means no dealing with complicated market interfaces.

You can lock in prices for your first order faster on Coinbase than on most exchanges. Coinbase locks in your price when you initiate an order, rather than waiting for deposits to clear. You will receive the amount of cryptocurrency you purchased, at the set order price, after your deposit has cleared.

You can use credit and debit cards for instant Coinbase purchases, although your limits will be substantially lower than if using a bank transfer.

Coinbase is based in San Francisco and has received several investments from prominent investors. It is also a U.S. based digital asset exchange, meaning its compliant with a slew of regulations.

Bittrex

Bittrex is another reputable exchange that allows you to buy Ethereum. However, it doesn’t currently have support for the deposit of fiat currencies. You’ll have to stock up on cryptocurrencies elsewhere, and use them to purchase Ethereum on Bittrex. The liquidity of ETH pairs and ERC-20 token pairs can be fairly advantageous when compared with other exchanges.

Bittrex stands out from Coinbase in that it has much lower fees, and offers over 250+ trading pairs. There are other exchanges such as Bittrex that allow for the exchange of Ethereum for hundreds of other altcoins. In order to use one of these platforms, you would have to transfer Ethereum into your Bittrex wallet address, then make your exchange on Bittrex.

Etherdelta

Etherdelta is the first decentralized ERC-20 token exchange. This is where tokens after every ICO are traded before any hit many of the larger exchanges. It was founded in 2014 and is located in the United States. Trading Ethereum is just slightly more complicated that placing an order to buy it, but it doesn’t take much practice to get the hang of it.

Once you’ve got your hands on some Ethereum, you can trade it for a wide variety of different altcoins provided the exchange you’re using on offers that specific ETH- pairing. Trading Ethereum is just slightly more complicated that placing an order to buy it, but it doesn’t take much practice to get the hang of it.

How to Trade Ethereum?

Step 1: Transfer your Ethereum to your exchange wallet. Most wallets come with their own Ethereum wallet functionality. To send your Ethereum over, you’ll need to send it to the public key of your exchange wallet. Be sure to make sure you are sending your address exactly as it is and confirm so you don’t lose your precious tokens.

Step 2: Placing the order. If your exchange offers different ETH pairings, you’d simply exchange the currency pair for Ethereum markets and type in the coin you’d like to exchange it for. Many exchanges don’t offer ETH pairings, but you can use a service such as ShapeShift to carry out the exchange.

Step 3: Making the order. Once you scroll down, you’ll see the option to buy or sell your token of choice within an Ethereum pairing. Simply type in the amount of the token you’d like to buy you’d like to buy, and adjust the price to something that is acceptable for you. Once you place an order, you’ll have to wait until the exchange market matches your order with another order (sometimes this happens instantaneously). Once completed, the currency will be added to your specified wallet.

Additional Resources:

Many exchanges come with a variety of tools such as live ticker charts to reflect the current state of the market and the Bid/Ask spread. Make sure you familiarize yourself with the tools available at your disposal to get the most out of your trades.

Exchanges usually come with different ranges of fees, so be sure to familiarize yourself beforehand. These fees usually fall within the .1% to .025% range, but they can vary. These exchange fees serve to reward the exchange for providing the exchange service.

Transfer fees, on the other hand, vary on the urgency of the transaction and type of token being transferred.

How to Store Ethereum

Storing your Ethereum is as simple as storing any other type of cryptocurrency. You have several different options at your disposal.

The first, and likely most convenient, is using a wallet that comes with the exchange you used to purchase your Ethereum. Exchanges such as Coinbase and Bittrex come with an Ethereum wallet that is very secure. However, it’s worth noting that any wallet connected to the Internet faces the risk of being hacked either directly or indirectly if the wallet provider gets hacked.

If you want to take your security up a notch, you will want to consider using a hardwallet such as the Ledger Nano S.

There are five types of Ethereum wallets.

Desktop Wallets

These are apps installed on your computer. The vast majority of desktop wallets are free.

These wallets will encrypt your private keys and require a password to decrypt them every time you open the wallet.

Desktop wallets come with a seed (which is usually a string of words) that you can use to restore your wallet if your computer gets stolen or lost. .

These wallets are exposed to a slight amount of risk because they live on your desktop.

Mobile Wallets

These wallets are apps installed on your phone.

These offer a higher degree of mobility and convenience.

They’re mostly free.

Mobile wallets come with a seed (which is usually a string of words) that you can use to restore your wallet if your computer gets stolen or lost. .

These wallets are exposed to a slight amount of risk because they live on your phone.

Online Wallets

These wallets exist on online platforms, and are often referred to as “hot” wallets.

Most of these wallets are free.

They provide easy access to trading, and many live on actual exchanges.

Since they’re connected to Internet, they’re inherently riskier.

Hardware Wallets

Hardware wallets live on a piece of physical hardware.

A huge selling point of hardware wallets is the fact that the live offline, and offer the highest degree of security you can get.

Hard wallets come with a price tag, and can cost upwards of $100 to $200.

Most hard wallets come with a seed that can be used to restore your wallet if you end up losing your wallet or it gets stolen.

Paper Wallets

These physical documents contain all of the data required to generate Bitcoin private keys.

This is essentially your private key either written exactly, or as a redeemable code.

Although technically safe, it’s really easy to lose a paper wallet. With that being said , generating your private wallets online can expose your private keys to malicious players.

Websites such as cryptocompare.com offer user reviews, overall ratings, evaluation metrics such as quality of extra services, ease of use, and anonymity.

Ethereum Virtual Machine

Ethereum’s goal is to give developers the flexibility to write more blockchain-powered programs that could automate and enforce particular outcomes.This is the primary reason why Ethereum created the Ethereum Virtual Machine (EVM). The Ethereum Virtual Machine is a Turing complete software that simplifies the creation of blockchain applications. Basically, if you want to create a blockchain application, you wouldn’t have to build an entirely original blockchain base for it. Ethereum makes it possible for potentially thousands of different decentralized applications, all within the Ethereum ecosystem. You can see Ethereum’s blockchain here.

Further Development

Ethereum was founded by Vitalik Buterin, a young Russian-Canadian programmer who is nothing short of a celebrity in the cryptocurrency community. Ethereum’s white paper came out in late 2013. Buterin argued that Bitcoin needed a scripting language to foster the development of new applications.

When his argument didn’t gain a significant level of agreement in the Bitcoin community, he proposed the development of a new platform that would support a more general scripting language (Ethereum).

Although Ethereum has come a long way, there are many updates on the horizon.

Thankfully, many of the updates come with a unique name. The best way to conceptualize Ethereum thus far as being a 2.0 version of the original Ethereum. The Metropolis is essentially a version 3.0, and the first rollout of Byzantium is a further feature-incomplete version with updates not included in Metropolis. The rest of version 3.0 is being rolled out in the future update called Constantinople.

Future updates include Plasma, which aims to help Ethereum further scale its capabilities, zk SNARKS/STARKS, Tangle, and the Lightning Network.